Investing: small banks, big dividends

April 14, 2014|By Carolyn Bigda | Kiplinger's Money Power

Kiplinger's Personal Finance

Not all banks have been dividend duds since the Great Recession, when many firms slashed payouts to pennies per share. A recent report by SNL Financial, a financial-services research firm, found that 20 banks had lifted their payouts by at least 2 percent each year from 2009 through 2013.

You won't find any big banks on the list. Rather, it's made up of community and regional players with median total assets of $650 million (the loans a bank has made and any money it has invested). We found three that pay more than the 2-percent yield of Standard & Poor's 500-stock index, trade on Nasdaq and have at least $2 billion in total assets.

First of Long Island Corp. (symbol FLIC; recent price, $41), with branches in the New York City suburbs, benefits from its location in a market with rich demographics. In the fourth quarter of 2013, the bank's loan balance grew by an eye-popping 29 percent over the same period the year before. Thanks to growth like that, the company has been able to raise its dividend by an average of 7.6 percent annually over the past five years.

A competitive banking market in the New York City metro area is capping profits in the near term, says Raymond James analyst William Wallace. But he believes prospects are better over the long term because roughly one-third of First of Long Island's cash deposits are in non-interest-bearing checking accounts. If short-term rates rise, the bank will be able to charge more for loans without having to pay more to depositors in no-interest accounts.

United Financial Bancorp (UBNK; $19) stuck mainly to high-quality loans throughout the real-estate boom. So in 2008, when the average regional bank stock fell 23.5 percent, United Financial gained 38.8 percent. Now the Springfield, Mass., firm, which owns United Bank, is merging with Rockville Financial, based in Rockville, Conn. Once the merger is completed later this year, the combined company will have some $4.8 billion in assets, nearly doubling United Financial's size and helping to boost growth in today's low-rate environment. In fact, earnings are expected to increase by 10 percent in 2014.

BancFirst (BANF; $57). With more than 100 locations throughout Oklahoma, BancFirst also sidestepped big losses during the housing bubble. As a testament to the bank's strength, the firm announced in January that it had reached an agreement with the Federal Deposit Insurance Corp. to assume operations of a local competitor. About 30 percent of BancFirst's income-producing assets are in cash, as the bank waits for interest rates to rise.

(Carolyn Bigda is a contributing editor to Kiplinger's Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com. And for more on this and similar money topics, visit Kiplinger.com.)